To Bounce Back Strong From COVID-19, America Needs An Entrepreneurship Agenda
Co-authored by Tim Draper, Global venture capital investor, and founder of Draper Venture Network and Arvin Patel, COO, Invention Investment Funds at Intellectual Ventures, Entertainment & Tech Thought Leader
COVID-19 has exposed a much-neglected wound in American capitalism which now threatens America’s ability to recover quickly from the ensuing economic crisis. As we come out of the crisis, we are faced with a tragedy of the loss of millions of small businesses with 40 million unemployed in the US, and ten times that many globally. America’s global leadership is being put to the test, and we must rise to meet the challenge.
Entrepreneurship and innovation have long been this country’s greatest strengths, creating all the net new jobs, creating extraordinary wealth, and building a better life for all of us, yet decades of neglect have left our startup ecosystem in a shambles just when we need it most. We need to act quickly to protect our innovators — not just from over-regulation that comes from negotiations between big corporation lobbyists and government pandering, but from the threats posed by predatory monopolists, intellectual property thieves and market distortions that our policy-makers have allowed to flourish.
So just how bad is it?
Entrepreneurship has been on a long term decline in the US even before COVID-19 hit. According to research published in the National Bureau of Economic Research, new business starts have been falling for decades in both absolute and relative terms, and fewer people were employed in young companies now than in the 1970s. In the middle of the last decade, the Kauffman Foundation and the Brookings Institution found that the number of new companies as a share of all US businesses dropped 44% between 1978 and 2012.
Worse, American companies are starting to lag in innovation. The World Intellectual Property Organization reported the number of patents filed in the US between 2018 and 2019 fell 1.6%, the first decline in a decade, while global competitors like China (11.6%), India (7.5%) and the EU (4.7%) saw increases.
The ability to develop new products and bring them to market has always been the American competitive advantage against low-cost manufacturers from overseas, and we are letting it slip away. The IP we do create is at risk: not just from foreign governments like China, but from unscrupulous domestic competitors who “catch and kill” potentially disruptive ideas and co-opt smaller players to avoid necessary change in their own operations. It’s no surprise that Google and Facebook are under investigation for anticompetitive behavior, and the FTC is taking a closer look at Alphabet, Amazon, Apple and Facebook acquisitions of companies too small to require reporting under current law.
Finally, the entire ecosystem is tilted to give big, politically well-connected players and cash-rich private equity firms too much control over the financial fate of new companies. This privileges short-sighted quarter-to-quarter thinking, rent-seeking and monopolistic impulses over the nimble, ingenious, and transformative ideas we urgently need, while removing incentives for incumbents to improve on stagnant business models.
Any single action taken by big companies or investors to thwart disruption or take the quick payout might be defensible on its own. However, the collective impact of all these short-term decisions has had grave systemic consequences.
Today, the health of our startup sector is too important to leave to the mercies of malign actors who claim to favor a free market but step on irritating smaller competitors whenever it suits their interests. That’s why we propose the following “Entrepreneurship Agenda” of common-sense measures that levels the playing field for startups:
First, back off!! No regulation without representation! Very few lobbyists currently represent small businesses. Regulations created for large companies should be specified only for the large companies that lobbied for them. Regulations written more than 50 years ago should be eliminated or re-written for a more modern economy. Companies below 500 employees should be freed of administrative overhead of form-filling and social engineering required of and by larger companies.
Second, strong and consistently-enforced protection for IP including either support for the small business being threatened, or deterrence to predators from larger companies, who use their might to steal innovations from smaller inventors. Having a larger arsenal of lawyers should not be the determining factor in a dispute.
Third, a vibrant startup ecosystem requires the kind of nurturing we give to our children. Whether it be to allow startups to run unimpeded by new regulation unless or until harm to many has been proven, or vigilant antitrust enforcement to prevent our top 4–5 tech firms from bigfooting new entrants to their markets, the startup needs operate in a protected environment. There’s too much at stake to let preemptive regulations or oligopolies trample on grassroots innovation.
Fourth, if our government is going on a debt-driven stimulus binge to recover from the economic damage of COVID-19, we should at least put some of that money into investments that lay the groundwork for our future growth. For some reason that baffles us, the government has not allowed startups with venture funding to participate in the stimulus package! These are exactly the startups that will be pulling us out of this funk!
And finally, to avoid the situations where monopolists buy novel technologies to shelve them, so that they can keep their cash cows where the consumer suffers, we should create incentives for startups and their backers to scale up rather than sell out. Let’s avoid the current buyers’ market dominated by slow-footed behemoths that fear disruptive innovation. We propose a simplified tax code that rewards patient investors rather than hasty exits, the ability for venture capitalists to run flow-through unlimited life corporations rather than the complex system of LLCs and Partnerships that exist today.
Some might argue that these measures remove too much useful rigor from the startup process. Barriers to entry are high for a reason, and we risk distorting the market by providing these kinds of protections. Under ordinary circumstances, that’s a colorable argument. But we are not in ordinary circumstances.
When the curtain lifts on our economy, we are going to need the most daring and creative minds in the country to lead us forward. It’s not about their willingness to take risks: founders and innovators already assume plenty of risk by daring to do something new, even when markets are strong, and capital is flowing. This is about helping all of us — technologists, investors, consumers, workers, citizens — reap the larger systemic benefits of their risk-taking to put a solid foundation under the rest of the economy.
We need to protect our young companies from intellectual property predators so they can grow stronger, faster, and bring innovations to market when we need them most. We’re not guaranteeing success for any one given business, but by supporting our entrepreneurs, innovators, risk takers and startups, we’re helping guarantee long-term success for us all.